This blog post calmly examines why the jeonse deposit, though appearing like a stable asset, actually contains credit risk similar to stock investments, through its contract structure and institutional limitations.
Why is jeonse as risky as stock investing?
While investment principles and approaches vary slightly from person to person, most people essentially seek two things: higher returns and lower risk. In other words, they prefer choices that are both stable and offer high returns. Similarly, steady GDP growth with minimal fluctuations is ideal, and everyone eagerly anticipates investment returns with low volatility coupled with significant asset appreciation.
However, the concept of ‘risk’ is more complex than one might think. Since the value of stocks or exchange rates fluctuates constantly, one can gauge the magnitude of risk by observing price movements and volatility. But there are also cases where the price doesn’t change, remaining stable, only to suddenly become zero at some point. This means that even investments appearing highly stable can, albeit with low probability, carry the risk of vanishing entirely in an instant.
What if your asset value becomes worthless?
A prime example is the jeonse deposit. The deposit amount is fixed at contract signing, is refundable upon contract termination, and retains its value throughout the lease period. On the surface, it appears to be a highly stable asset. But is this truly a safe choice? Situations where landlords cannot return the deposit actually occur quite frequently, and in such cases, the value of the jeonse deposit plummets to near zero in an instant. Unless you are an expert, it is difficult to detect this type of risk beforehand, making such transactions riskier than stocks in some respects.
As mentioned earlier, the value of some well-known company stocks or foreign exchange rates fluctuates constantly. That said, instances where a stock’s value plummets to half or less, or even a third or less of its purchase price, occur less frequently than one might think. Often, even if it takes time, the value recovers. Of course, cases where a company’s poor management causes its stock price to crash, or where bankruptcy leads to delisting, certainly exist. However, stock investment inherently accounts for such risks, and since stock price fluctuations are disclosed in real-time, warning signs of risk are relatively visible externally.
When entrusting money to someone, there is always a risk of not getting it back. This risk is common to all forms of contracts involving money exchange, not just between individuals, but also in transactions with companies or financial institutions. This is called ‘credit risk’. If the contract is fulfilled as specified, there is no issue. However, problems arise if the debtor loses the ability to repay due to business failure or intentionally fails to repay. Broadly defined credit risk includes fluctuations in the value of stocks or bonds caused by a company’s failure to fulfill its obligations. Here, we will focus on credit risk in a more narrow sense.
Unavoidable Credit Risk in Jeonse
Financial institutions are relatively familiar with this type of risk. They conduct credit assessments based on the premise that there is a possibility of not recovering the money, and prepare for risk by setting different interest rates according to credit ratings. For example, if an individual’s credit rating is low, implying an 8% probability of default, the bank must apply an interest rate at least higher than that to hedge against the potential loss. The reason interest rates decrease when collateral is provided is that even if repayment fails, the collateral can be liquidated to mitigate losses. Therefore, higher loan interest rates for lower credit ratings are a natural phenomenon and not an issue of discrimination. Credit ratings also exist for companies and countries, and their fundamental principles are not significantly different from those for individuals.
The problem lies not with financial institutions but with individuals. When entering into monetary contracts, individuals find it difficult to accurately assess and recognize the magnitude of risk—that the value of an asset could drop to zero under the specific circumstance of contract default, even though its value typically remains stable.
Moreover, credit risk often only becomes apparent near the end of the contract.
A jeonse contract embodies all the risks described above. The tenant lends a large sum to the landlord in exchange for using the house. Since the value of this large sum remains unchanged under normal circumstances, the tenant perceives it as relatively safer than stock investments. However, this contract relies entirely on the landlord’s creditworthiness, and there is a clear risk of not getting the jeonse deposit back if the landlord encounters problems.
Financial institutions are familiar with credit risk and can assess it relatively proficiently, but tenants are not. Furthermore, when an individual deposits money with a financial institution, not only is the stability of the financial institution itself higher than that of an individual landlord, but government deposit insurance also provides protection. In contrast, the landlord’s stability is relatively low, and the level of government protection for jeonse contracts is also limited compared to the deposit insurance system.
Jeonse tenants might feel they shouldn’t have to bear this risk, especially since they aren’t seeking high returns. However, it’s also true that they enjoy significant benefits by using the living space without paying monthly rent. Whether house prices rise or fall, tenants do not directly profit or lose, so they might consider the jeonse deposit safer than investment activities like stock trading. However, the risk of not getting the deposit back is difficult to predict and hard to prepare for in advance.
Simply put, if house prices fall below the deposit amount, getting the full deposit back becomes quite difficult. Furthermore, while landlords withholding the deposit until finding the next tenant constitutes a breach of contract, this practice is actually quite common. Despite the numerous risks inherent in the jeonse system when examined closely, it has been neglected simply because it is a long-standing practice. System improvements are delayed during periods of rising home prices, only for the cycle to repeat when prices fall, resulting in numerous victims.
From the Jeonse System to the Monthly Rent System
The Jeonse system involves large sums of money changing hands between individuals, yet its nature makes it extremely difficult to identify inherent risks beforehand. If a decision is made with full awareness of the risks, responsibility rightfully lies with the individual. Even so, the sheer scale of money involved makes it hard to view the Jeonse system purely as a private transaction. As mentioned earlier, tenants find it difficult to verify accurate information about landlords, and it is practically impossible for them to possess the level of expertise found in financial institutions like banks.
For these reasons, there is a need to more actively utilize the monthly rent system, which carries a relatively lower deposit burden. The government also needs to gradually shift its policies towards supporting monthly rent rather than jeonse. Of course, the jeonse system has its advantages, and individuals may benefit from it depending on their circumstances, so careful judgment is necessary.
Individuals must recognize and educate themselves about various risks. Whether it’s stocks or housing prices, one must always keep in mind that during an uptrend, it’s easy to forget the possibility of a downturn. It’s also necessary to understand and prepare for the fact that even seemingly stable contracts carry inherent credit risk.
Attempting to avoid risk unconditionally may lead to overlooking other forms of risk. Legal mechanisms exist to partially supplement the stability of contracts, so it is advisable to familiarize oneself in advance with the systems and regulations that provide legal protection, alongside economic principles. The government also bears the responsibility to establish strong penalties and institutional preventative measures to reduce crimes such as jeonse fraud and stock price manipulation.
Pursuing both high returns and low risk simultaneously is the most ideal scenario. However, achieving this goal exactly as envisioned in reality is extremely difficult. In practice, when examining financial products, one must typically choose among high-return/high-risk, medium-return/medium-risk, or low-return/low-risk options. Products that appear to offer high returns with low risk often conceal hidden dangers beneath the surface. Therefore, a more meticulous approach is necessary before making investments or entering contracts.
